German court rules in favour of ESM with conditions UK jobless claims fall sharply

European markets opened mixed but soon rallied as the German constitutional court rejected thousands of injunctions from disgruntled opposition to Germany’s participation in the European Stability Mechanism (ESM) to help smooth the way for the euro area to attempt to contain the debt crisis. The court also ruled against claims that stricter budgetary controls was unconstitutional.

The FTSE 100 rallied 18pts or 0.3% whilst the DAX and CAC both saw stronger gains of 0.7% as investors reacted with some relief to the German court decision. Yet as much of the ruiling was expected, the relief rally lacked some momentum.

The court’s acceptance of Germany’s participation with the ESM alongside conditions was expected by many – a rejection would have been a complete surprise. Those conditions outlined that any increase on the German liability beyond €190bn must be ratified by the lower house of parliament first, whilst ESM decisions must also be submitted for approval to both upper and lower houses of parliament, effectively ruling against a confidentiality clause within the treaty.

The ruling was no surprise of course but the positive is that it removes that air of doubt from the markets as well as the last big obstacle to get the ESM working. The ECB can now purchase bonds to keep stressed sovereign bond yields from escalating beyond unsustainable levels through the Outright Monetary Transactions programme.

One element that needs to be watched however is the fact that any increase above €190bn in terms of liabilities to Germany must be approved by the lower house of parliament, which of course will give rise to uncertainty as to whether bigger bailouts can happen if and when that level is breached. In that sense Germany maintains a grip on the trigger finger for the ESM at certain levels, which is to be expected considering the ESM could never work without Germany’s involvement as the powerhouse of Europe.

Investors remain intensely focused on stimulus efforts. We have Outright Monetary Transactions from the ECB, the German constitutional court ruling this morning to approve the ESM, China looking increasingly likely to act to stimulate slowing growth and of course the FOMC starting a two day policy meeting today with many investors hoping to hear the Fed announce further stimulus measures tomorrow.

So it would seem that many have or are starting to deliver on core stimulus that the markets wants to see yet I get the sense that if the FOMC announces an aggressive third phase of quantitative easing, that’s the game changer. The chances of this remain 50/50 however.

UK jobless claims sharply fall
Data showed that UK jobless claims fell surprisingly sharply by 15,000, marking the largest fall in claims since June 2010, though the unemployment rate nudged up to 8.1%. The data also showed that quarterly employment levels hit its highest levels since March to May 2008, raising optimism that the UK labour market is gaining traction. The pound sterling was left relatively unchanged in reaction to the labour data however.

Kingfisher shares rise despite profits fall
Kingfisher shares opened lower but soon swung between gains and losses in trading despite the ‘Do It Yourself’ retailer reporting a bigger than expected drop in profits for the first half of the year.

Kingfisher saw pre-tax profits fall 15.5% to £371m, when the market had expected a much smaller fall in profits to £395m.

Much of the fall in profits were weighted in three key elements; exposures to forex fluctuations, dreadful weather and consumer headwinds in the UK and euro area. Forex fluctuations in the euro caused £25m to be knocked off profits. This is a really disappointing element that could have been avoided with FX hedging, an element many global companies undertake. The dreadful weather that affected the UK and Europe also gave a negative influence on the aspirations of homeowners to improve their homes and gardens, whilst the well known consumer headwinds also left an impact on footfall to the firms group of stores including B&Q.

Burberry Group shares has attracted bargain hunters today looking to pick up the firm’s shares having seen a 20% fall yesterday on the back of a surprising profit warning. Shares rose around 1% in early trade.